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According to the California Employment Lawyer, a 2019 case, O’Grady v. Merchant Exchange Productions, Inc., by the California Court of Appeals decided “that a mandatory service charge could potentially be found to be a gratuity that must be distributed to service employees.” The case revolved around California Labor Code section 351 which requires that gratuities be distributed to non-managerial employees who “actually serve customers.”

In the case, Ms. O’Grady was a banquet server and bartender in a San Francisco Ballroom operated by the Merchant Exchange Production company. Ms. O’Grady filed a class action lawsuit claiming that she and other non-managerial employees should be paid the 21 percent “service charge” added to every banquet bill. She claims the service charge was indeed a gratuity. The class action lawsuit claims that the customers would reasonably believe the service charge was a gratuity, since the amount was within the standard range for tips. The plaintiffs claimed that the failure to pay the plaintiffs violated the California Unfair Competition Law (Business & Professions Code Section 17200) – based on the “intentional interference with advantageous relations, breach of implied contract, and unjust enrichment.”

The Court of Appeals used the following reasoning.

  1. The California Labor Code does protect employee gratuities.
  2. The term “service charge” could have different meanings.
  3. The court recognized prior cases in which the service charge was not a gratuity.
  4. The court distinguished those cases from the current claim of Ms. O’Grady and the other class action plaintiffs. Part of the distinguishing analysis was based on the customs within the hospitality industry.
  5. The court decided that the case could proceed.

The ruling clarifies that employers must make clear to both customers and employees when a “service charge,” is not meant to be a gratuity. Clarification can be made through contracts, menus, receipts, and other means.

At the California Law Offices of Stephen A. Danz and Associates, we explain to employees that even small claims may yield big rewards if they are part of a class action lawsuit. We are experienced at filing employee rights class action cases. For help with any employee claim, call us at 877-789-9707 or use our online contact form to make an appointment. Se habla espanol.